04 Oct 2007

EU: Central Banking Without Gettysburg

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George Friedman, at Stratfor, discusses the fundamental contradiction of the current European Union.

How do you have multiple sovereign states within a single central bank? How do you reconcile national sovereignty with a multinational monetary system when it is impossible to create a single monetary policy that satisfies the policies of multiple sovereign nations? Someone must always be hurt. What is of great significance is that Sarkozy has made it clear that it is France, one of Europe’s founders, that is being hurt — to the benefit of its partner, Germany.

This leads to the more immediate question: If Germany and France undertake fundamentally different approaches to economic development, how can both of these strategies be contained in a single European structure? In a way, it would have been simpler had there not been a euro. Multiple economic strategies can be reconciled with a customs union, or even a multinational regulatory system. But reconciling multiple economic approaches with a single currency cannot happen.

The United States confronted this question in the past. In the 1850s, some states wanted a radical revision of social, economic and monetary policy that would benefit them but leave other states at an enormous disadvantage. The industrializing part of the country wanted policies that would protect its interests. The agricultural part of the country, heavily dependent on exports, wanted a different policy. A conference was held in 1863 at Gettysburg. Both sides made compelling arguments over three days, but in the end it was decided that not only would the policies of the industrializing states be followed, but no one would be permitted to withdraw from the economic, political and social union of the United States. State sovereignty was to be limited and federal power was to be paramount.

It was the Union Army that made the most convincing argument at Gettysburg. There is no Union Army in Europe. There is no sovereign center that can hold dissidents in the monetary or economic union. And there is, for that matter, no power on Earth that can keep France and Germany within a single system if they do not want to be there. Sovereignty, without the slightest shadow of doubt, rests with the nation-states of Europe — and the European institutions will last only as long as they reflect the interests of all of these nations.

George Friedman has started blogging.

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Frank Dobbs

Who can forget the Gettysburg Economic Report:

“Fourscore and seven years ago a new Tariff system was born upon our continent, and dedicated to the proposition that fiscal policy should support manufactures…”

The South destroyed itself economically and lost 18% of its fighting age males so that tariff levels could be reduced? Pretty bad investment, even if they had most improbably won.

They should have listened to Goethe, who said double entry bookkeeping was the greatest invention of the human mind.

Or maybe there were other issues, such as the need to define liberty in the old way –as applying to me, and not to thee.



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